Without a doubt, 1998 has been a tremendous year for U.S. housing, but industry economists warn that a contraction is coming next year even as interest rates remain low and inflation is nonexistent.

While none of them see a recession on the horizon, they are looking for substantial slowing in the year ahead for the economy as a whole, with a mild economic pickup in 2000. Housing, the economists say, simply cannot be immune from a broad economic slowdown.

They agree that the chief culprit is Asian economic flu that has already spread to Eastern Europe and Latin America. Those disruptions are curtailing U.S. exports, a problem that the economists expect will intensify at least through the first half of next year.

"The trade balance is going to get worse and that's going to affect jobs," says Fred Flick, vice president of economic research at the National Association of Realtors. He sees unemployment rising a tad, from 4.5% this year to 4.7% in 1999.

But there are two other factors especially working against housing, the economists say: This year's torrid pace in growth simply cannot be sustained, and investors' flight to safety will make it difficult for homebuilders to borrow funds to finance their operations.

The realty association forecasts a 7.3% decline next year in sales of new homes and resales to 5.5 million units, down from six million this year. The association also projects another slight dip in total sales in 2000.

To be sure, industry economists stress that 1998 has been a spectacular year for housing and industry economists are quick to point out that next year's projected performance is still ahead of 1997's relatively strong showing.

According to the realty association, 5.3 million homes were sold last year, or 3.6% less than what the association is projecting for next year.

"This is not a housing collapse," says Dave Seiders, chief economist at the National Association of Home Builders. "It's a downshift." Mr. Seiders is forecasting a 7.9% drop in total new housing next year to 1.8 million units, down from two million this year.

Robert D. Barr, senior economist at the Fannie Mae, is looking for a 6.7% slide in total housing starts from the 1.6 million units he forecasts for this year.

"This year has been a tremendous year," Mr. Barr said. "We just don't feel 1998's starts are sustainable." He is looking for 1.5 million starts next year, which he describes as "a relatively strong number."

Investors' flight to safety is beginning to take its toll on homebuilders, Mr. Seiders says. "The scramble for credit quality is pushing down Treasury rates but other rates have not been going down but have gone up," he says.

Investors unnerved by international economic tensions in droves have jumped into U.S. Treasury instruments, driving down the yields for notes and bonds to lows not seen in more than a generation.

One effect is a diminishing demand for mortgage-backed securities on the part of investors, such as pension funds, insurance companies, and wealthy individuals.

Mortgage lenders insist this development is squeezing them, and therefore they must raise interest rates that they charge to homebuilders.

Cushioning next year's slowdown for the housing industry are the lack of inflation, and a slight falloff in consumer demand for housing due to the economic slowdown. This environment will cause mortgage interest rates to fall, the economists say, and therefore stimulate some housing purchases.

The NAR says mortgage rates are already slipping, with the 30-year fixed rate mortgages dropping from the 7.1% that held throughout the first half of the year to 6.9% in the current quarter. The NAR projects that rates will drop again in the fourth quarter to 6.6%.

The forecast for one-year adjustables in the fourth quarter is 5.3%, down from the 5.6% at the beginning of the year.

"Next year they get even better," says NAR's Mr. Flick. "We're looking at the low to mid-sixes." The average over 1999 is expected to be 6.2%, he says. His forecast calls for the one-year adjustable instrument to average 4.9% next year, down from this year's 5.5% average.

Mr. Seiders is looking for help from the Federal Reserve Board in continuing to ease interest rates to try to prevent the U.S. economy from sliding into recession.

"I'm looking for the Fed to give us a Christmas present," Mr. Seiders says, explaining that he expects a another quarter-point reduction in the Federal funds rate by no later than the Dec. 22 meeting of the Federal Open Market Committee. He added that he would not be surprised if the committee acted as early as its Nov. 17 meeting.

"I expect a full point (reduction) by mid-'99," says Mr. Seiders, who was a senior economist at the central bank from 1970 to 1984.

The economists expect the economy to turn up in 2000, and Mr. Barr and Mr. Seiders are forecasting that housing will also rebound, but not to this year's level.

They caution, however, that forecasting what is going to happen two years from now during these dicey times is problematic at best.

Mr. Barr points out that his projections do not take into consideration any possible disruptions caused by the Y2K computer problem. "We'll just have to wait and see," he says. For housing, Mr. Barr is forecasting a 1.6% recovery in single-family starts in 2000.

Mr. Seiders projects a 2.9% improvement in total new housing in 2000. But one of the assumptions he is basing the rebound on for both the economy and housing is that the economic dislocations abroad will have stabilized by next year's third quarter.

"If things are deeper and longer in the foreign sector than we anticipate them, then our forecast is too optimistic," Mr. Seiders says.

Mr. Flick differs from his two colleagues in that he does not forecast an upturn in housing in 2000. Rather he sees another downturn in total single family home sales, but only by 0.3%.

He adds, however, that he has little faith in forecasting what the economy and housing will be like two years out due the wobbly world conditions.

"Technical (forecasting) models do very well when everything is going in one direction," he says. Now that the economy is "getting toward the end of the cycle, "he says, the models tend to send out unclear signals.

"Forecasting out to the year-2000-it's kind of absurd."

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